EUR/GBP – Bearish Divergence and a Cracked Trendline

The EUR/GBP has been on a sharp bullish swing since finding a low at 0.7106 in April. The 4H chart shows a bullish swing that looks like a clear bullish “impulse wave” (in Elliott Wave terminology).

EUR/GBP 4H Chart 5/7(click to enlarge)

We will get back to the structure later. For now, note that there is a bearish divergence between price and the 4H RSI (higher price higher with corresponding lower RSI high). This suggests a potential bearish attempt, which is already materializing. There was a bearish engulfing candle from 0.7483, then the following couple of 4h candles are cracking a rising trendline from the end of April.

In the very short-term, a break below 0.74 should clear the rising trendline, and open up at least the 0.73-0.7315 support area, which also involves the 50-period simple moving average (SMA). If a subsequent bounce finds resistance around 0.74, watch out for a head and shoulders pattern, which puts pressure on the 0.73-0.7315 level.

A break below 0.73 with the 4H RSI falling below 40 then opens up the 0.7250 area. A bullish market should probably not fall beyond that and hold above the cluster of 200-, 100-, and 50-period SMAs. A break below 0.7210 however would likely be a clear indication of bearish continuation, especially if the 4H RSI falls below 30 as well.

EUR/GBP Daily Chart 5/7
(click to enlarge)

The daily chart shows a market shifting from bearish to sideways if not bullish. Price has broken a falling trendline, and above the 50- and 100-day SMAs. Meanwhile, the RSI tagging 70 shows initiation of the bullish momentum.

There is further upside to 0.7595-0.76 support/resistance pivot.

Now, regarding the structure, we noted that the swing since late April was an “impulse” wave, which is indicative of a trend. That is, unless it is the A or C wave of an ABC correction. The daily chart shows that there is indeed a potential ABC pattern since the March and 2015 low at 0.7014.

Yes, this analysis does not give a directional outlook. EUR/GBP is indeed at the crossroad. IF we look at the 4H chart, we have some near-term bearish outlook, but the short-term bullish outlook is still in play. In the medium-term, the bearish trend is shifting, but it could have also been an ABC correction.

These are the scenarios we have to juggle with. From a fundamental basis however, we should keep a preference for the bearish outlook because the ECB is more dovish than the BoE.

Fan Yang has been a professional forex trader and analyst since 2007.
He specializes in technical analysis and has a Chartered Market Technician designation since 2011.
He was the chief technical strategist at CMSFX
He was also the founder and chief currency strategist at FXTimes
Over the years, Fan has not only been a trader and analyst but also an educator.
As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals".
Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.

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